An unexpected — and major — expense is just one way your savings could take a bad turn. A losing stock market turn could also wipe out years of savings. Just ask anyone who lost money when stocks plunged in 2008. In the US, workers lost an average of 24% from their 401(k) retirement accounts that year. And more than half of US parents with 529 college savings plans saw their balances go down in 2008, with almost a quarter reporting a decline of more than 30%. In the UK, the 2008 financial crisis led to an £815bn ($1.16tn) decrease in wealth overall — an average of almost £31,000 ($44,190) per household — because of a plunge in housing prices and a drop in the value of pension funds and investments.
When your savings suddenly disappear, what you do next matters. “The bottom line is that you now have fewer resources than you expected,” said Mark LaSpisa, a financial planner with Vermillion Financial Advisors in Illinois in the US. “So you need to make some decisions.”
Here are a few strategies for dealing with a big financial hit.
What it will take: You’ll need patience, fortitude and the ability to look at the big picture. Losing a lot of money can be stressful and daunting, and you’ll have to make smart, but possibly different, decisions about saving and spending moving forward.
How long you need to prepare: Most big financial losses come as a surprise, but there are things you can do to absorb the hit. A healthy emergency fund with three to six months of living expenses can give you breathing room while you weigh your options — or even cover an expense in the short term. If your investment portfolio has taken a dive, it’s important to take some time to consider your options rather than take money out in a reactionary way.
One option is to borrow strategically. Sometimes it pays to use debt in the short-term while your savings recover, rather than withdrawing money from a decimated portfolio. “In 2009 one recently retired client chose to borrow money on her line of credit, rather than pull money from her IRA,” which had seen a loss, said David Demming, a financial planner with Demming Financial Services in Ohio in the US. “You want to have choices, which is why liquidity is so important. We use debt selectively, in lieu of assets, in certain environments.”
When interest rates are near zero or very low, as they have been the last several years, this might make even more sense.
Do it now: Assess the impact. “Now is the time to look objectively at all income streams and outgoings and see if savings in expenditures or increases in income from other sources could make up for some of the impact of the recent loss,” said Peter Brooke, a financial planner with the Spectrum IFA Group in Valbonne, France. “Are there things that could be sold or small jobs that could be undertaken to bring in a bit more money?”